A Guide to Buying Your First Commercial Property in Philadelphia (2023)

FAQs

What to know when investing in commercial real estate? ›

Vacancy rate: 1.6% Investment sales trends: $516 million in Q1 2022, median sales price per unit $179,543, 5.2% average cap rate.

Overall, a low performing property will have a rate of return closer to 6% while a high performing property will reach rates of return of 12% or better.

Most commercial loans are not fixed for 30 years like they are with residential real estate. In commercial real estate loans balloon in 5, 7, or 10 years. Regardless of interest rates, you will need to refinance in 5, 7, or 10 years or sell the property to pay off the lender.

You can estimate the cost of commercial construction by collecting data on the project, such as size, location, materials, complexity, and labor costs. This data is used to generate a budget that includes labor, materials, services, and other related costs.

The average cost for Office Space for lease in Philadelphia is about $26.78 per square foot.

Common areas – 80-100 square feet per person. Conference rooms – 25-30 square feet per person. Executive offices – 90-150 square feet. Open workstations – 60-110 square feet per person.

The 70% rule can help flippers when they're scouring real estate listings for potential investment opportunities. Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home.

How do you negotiate commercial real estate? ›

If you are focusing on buying investment rental properties, Philadelphia is most likely the perfect place for you. The percentage of Philadelphia renters keep growing, while home prices are some of the most affordable in the United States–making this an ideal city for real estate investment properties or buying a home.

According to Zillow, Philadelphia properties saw a roughly 10% price increase in the last twelve months (October 31, 2022), and they expect prices to go up in 2023 by 0.8%. The months' supply has shrunk to 1.59 months as of November 2022.

Other promising neighborhoods are Bella Vista, East Falls, Old City, Queen Village, Fairmount, and Woodland Terrace. In 2022, the median home price in Philadelphia is $233,563, up 6.5% year-over-year. Philadelphia is also one of the best cities for Airbnb investment, because of the large number of tourist attractions.

The 50% rule is a guideline used by real estate investors to estimate the profitability of a given rental unit. As the name suggests, the rule involves subtracting 50 percent of a property's monthly rental income when calculating its potential profits.

What Is The 1% Rule In Real Estate? The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.

This is a general rule of thumb that determines a base level of rental income a rental property should generate. Following the 2% rule, an investor can expect to realize a gross yield from a rental property if the monthly rent is at least 2% of the purchase price.

If a commercial real estate loan has a prepayment penalty, it will be assessed at the time the loan is paid in full prior to maturity and within the prepayment penalty period. Most loans are typically repaid when a borrower decides to pay off the loan early, or when a property is sold.

The lifespan of a commercial building on average ranges from 50 to 60 years and can go further depending on the preservation techniques employed by the owner and the way the building is utilized. Every structure is unique, and its endurance depends on its build quality and maintenance management.

What is the interest rate on a commercial loan? ›

In February 2023, most pundits believe the construction materials cost will continue to fluctuate. The consensus is that the cost of most materials will not return to pre-pandemic levels this year, though they should come down or at least not increase as dramatically as they have been.

1. Unit pricing. This method of construction cost estimating is the most common. The unit pricing method is achieved by calculating the overall cost of the project based on unit costs.

Building value is the value of the physical structure of a home. Property value includes building structure and the value of the land the home sits on.

Cheap office space is usually cheap because the landlord hasn't invested a lot of money into the space itself. Maybe the owner got a deal on the property and it's one of many commercial properties he or she manages.

Commercial tenants should be able to spend 5% to 10% of their gross sales per foot on rent. Your gross sales divided by the location's square footage will give you sales per square foot. For example, you estimate your business will make $300,000 per year in total sales, and you are looking at a 1,500 square foot space.

The cost of renting a shop in Philadelphia is very high. But the average cost of rent for a shop in Philadelphia is $2,500 per month.

The average size of buildings constructed before 1960 (26% of the commercial building stock) is 12,000 square feet; buildings constructed between 1960 and 1999 (55%) average 16,300 square feet; and buildings constructed in the 2000s (18%) average 19,000 square feet.

The height of each storey in a building is based on ceiling height, floor thickness, and building material — with a general average of about 14 feet.

According to Office Finder, it's best to allow about 175 square feet of space for each person who works in your office. Leaders and executives usually require between 200 and 400 foot square feet. Open office workstations only require about 100 square feet per person.

What is the 4 3 2 1 rule in real estate? ›

4-3-2-1 rule

The front quarter of the standard site receives 40% of the total value. The second quarter receives 30% of the total value. The third quarter receives 20% of the total value; and the rear quarter receives just 10% of the total value.

In case you haven't heard of the so-called Golden Rule in house flipping, the 70% Rule states that your offer on a property should be no greater than 70% of the After Repair Value (ARV) minus the estimated repairs.

What Is Micro-Flipping? Micro-flipping is a type of short-term real estate investment that involves buying properties in need of renovations and reselling them quickly for a profit, usually without improvements.

Why do Realtors say “highest and best?” “Highest and best” means that the seller has multiple offers and doesn't wish to negotiate. Instead, they want to get final offers from each buyer, with their highest offer and best terms, so they can compare and pick one.

In commercial real estate, every party in a given land or property transaction poses some financial risk. As a purchaser, you pose the risk of taking out too large a loan, not being able to make the payments, and hurting your credit. This is also a risk to the entity lending the money.

Unlike a residential real estate investor, commercial real estate investors lease out and collect rent from the businesses that occupy their properties rather than from residential tenants. It should also be noted that raw land purchased for commercial property developments is also included in this definition.

Real estate investment trusts (REITs) are the easiest ways to invest in commercial real estate. The REITs collect money from several investors to purchase and manage multiple commercial properties with this option. Dividends are paid to the investors.

Properties with the highest number of tenants are the ones that are capable of bringing in the highest ROI. These properties include apartment complexes, office buildings, student housing, RV parks, storage facilities, etc.

What commercial property has the most risk? ›

Single-tenant, single-use buildings like an auto dealership are the highest-risk commercial property investment. If the dealership goes out, you have 100% vacancy. And what other type of tenant could you find to occupy that space?

Cons of commercial real estate investment include their significant cost and management intensity. In addition, market risk, vacancy risk, and interest rate risk can put additional pressure on commercial real estate prices.

High Vacancy Rates

Unfortunately, there's always the risk of a high vacancy rate in real estate investing. High vacancies are especially risky if you count on rental income to pay for the property's mortgage, insurance, property taxes, maintenance, and the like.